Handbook Chapter

Extract

Economic theory and empirical evidence lend support to the view that openness to trade advances economic growth and hence reduces poverty (see Chapter 2 in this volume). The neoclassical approach explains the gains from trade liberalization by comparative advantage, in the form of resource endowments (as in the Heckscher–Ohlin model), or differences in technology (the Ricardian model). Endogenous growth theory shows that trade openness positively affects per capita income and growth through inter alia diffusion of knowledge and technology, innovation or direct foreign investment and increasing the size of the market to allow for economies of scale. At least since the late 1970s, developing countries were encouraged to pursue export-led growth and trade liberalization policies to allow them to exploit their comparative advantage. Asian countries that pursued outward oriented strategies and export-led growth in the 1960s and 1970s have achieved rapid growth rates and economic development. Most African and Latin American countries that initially followed import substitution strategies have implemented trade liberalization and export-led growth policies since the 1980s, but in general continue to lag behind East Asian rates of growth (Latin America has tended to perform better than Africa).

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